Regulatory fears frighten Bitcoin derivatives traders

On Tuesday (September 21), the chairman of the US Securities and Exchange Commission, Gary Gensler, confirmed plans to crack down on cryptocurrencies. In addition, the regulatory concerns of traders were confirmed by the Bitcoin futures and options indicator.

After 46 consecutive days of trading above $ 42,000, Bitcoin price began to show weakness on September 21st. A loss of up to 13% in the past three days was enough to wipe out hard-earned gains since August 6th. History also shows that it took the previous bear cycle 79 days to retrace $ 42,000.

Traders’ attention is focused on the beginning of the Federal Reserve (Fed) session when the Treasury is expected to announce whether or not it will cut its $ 120 billion monthly asset repurchase program. Oddly enough, the Chinese stock market, as measured by the iShares MSCI China ETF (MCHI), rose 1% on September 21.

Is China Really the Root of the Recent Correction?

The strong divergence between the performance of Bitcoin and the slight recovery in the global market has made investors question whether crypto regulation will play a role in the current bearish scenario.

Today (September 22), Gary Gensler spoke to the Washington Post and in an interview referred to stablecoins as a gambling tool in casinos, as reported by Bitcoin Magazine.

As attorney Grant Gulovsen notes, regulatory shadowing is expected to have a bearish effect in the short term, and investors in any market hate uncertainty.

“The crackdown by US regulators on cryptocurrencies has been going on for six months, and it looks like it’s getting worse week by week. I’m not even sure what the impact on the market is, but there is certainly not much to be optimistic about. ”

Bitcoin price chart | Source: TradingView

The $ 42,000 level played a key role in determining the end of the mini bear cycle that began with Elon Musk’s comment on Bitcoin mining energy use on May 12th.

To effectively measure the price risk of professional traders, investors should monitor the 25% delta deviation – an indicator that compares call and put options. It becomes positive if the put premium is higher than for call options with a similar risk.

Deviation indicators in the -7% to + 7% range are generally considered neutral. On the other hand, when the downside protection is more expensive, the index moves out of this range, usually the fear indicator.

25% delta deviation of Bitcoin options | Source: Laevitas

As shown above, Bitcoin options traders have been neutral since July 25th when the indicator fell below the 7% threshold. However, recent price action has put short-term options traders in a state of “fear” after the index hit 9%.

Options market confirms lack of investor confidence

In contrast to regular monthly contracts, the prices on the perpetual futures market roughly correspond to the regular spot prices. This feature makes it a lot easier for retailers as they no longer have to charge futures premiums or manually transfer positions just before they expire.

The funding rate is introduced to offset the level of risk on the exchange and it is calculated by long positions (buyers) when they need more leverage. However, if the situation is reversed and the short sales (sellers) are too heavily indebted, the funding rate becomes negative and they become the fee payers.

Bitcoin futures funding rate every 8 hours | Source: Bybt

The graph above shows that Bitcoin’s funding rate has become consistently negative, if not sustainable. For example, a funding rate of 0.05% every 8 hours, which equates to 1% per week, will not force a derivatives trader to close out their positions.

As a result, options market data confirms that the “fear” indicator comes from a 25% delta option deviation. Buyers are currently lacking confidence in the derivatives market, which could be related to recent regulatory concerns. The latest victim of regulatory pressure is Coinbase after the exchange decided to ditch its crypto loan product.

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Mr. Teacher

According to Cointelegraph

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